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Getting Saudi Arabia back on track

Saudis want the world in 2019 to refocus on economic investment, after unwelcome and distracting publicity

In the early part at least of 2019, Saudi Arabia's most urgent task will be to repair the damage to its international reputation. This was tainted over the past three years by the kingdom's conduct of the war in Yemen and the ensuing civilian suffering, which has left nearly 2mn people on the verge of starvation. But the real damage was caused by the murder in October 2018 of journalist Jamal Khashoggi in the Saudi consulate in Istanbul. International revulsion at the manner and circumstances of the killing—and the kingdom's initial attempts to insist that Khashoggi was still alive—will not evaporate overnight.

Despite allegations that Crown Prince Mohammed bin Salman knew about or even ordered the Istanbul operations, he will remain firmly in control in Saudi Arabia, silencing any dissent inside or outside the ruling family. But his father, King Salman, will continue his efforts since the Khashoggi affair to engage with the various branches of Al Saud which were passed over during the swift ascent of the young crown prince, and with the public in towns across Saudi Arabia.

The king will also seek to reinstate at least some of the traditional mechanisms that allowed for consultations among senior princes on important issues affecting the kingdom—rather than leaving all the reins of power exclusively in the hands of his son. Prince Ahmed bin Abdulaziz, a brother of the king who returned to the kingdom in the wake of the Khashoggi murder, will help behind the scenes to promote family harmony.

There are sound and compelling reasons why Saudi Arabia needs to polish up its image. The kingdom requires continued international support, from the US in particular, in its campaign to block the spread of Iranian influence in the Arab world. Curbing Iran's long reach was one of the stated aims of the war in Yemen, for which Saudi Arabia needs a steady supply of arms and equipment from a number of Western states. The governments of those states are under increasing public pressure to stop military sales to Saudi Arabia and cooperation with the kingdom.

On the economic front, Saudi leaders will work flat out in the year ahead to try to stop the flight of capital from the kingdom. This has been happening at an alarming rate since the mass arrests of prominent Saudis in November 2017 and their incarceration in the Ritz-Carlton Hotel in Riyadh. The shock of the Khashoggi killing and the air of uncertainty hanging over the kingdom will have persuaded still more Saudis to try to get their money out of the country.

At the same time, Saudis will seek to persuade foreign investors, made nervous by the events of the past year, to keep faith with the kingdom. Foreign direct investment has fallen away over recent months to a level not seen since the early years of the century. Questions about political stability in Saudi Arabia and about the ethics of doing business there will need firm, speedy and unequivocal answers if investment is to pick up again. The poor showing at the investment conference in Riyadh in October 2018 underlines the urgency of addressing these concerns.

11mn bl/d—output capacity in 2019

All this matters because Crown Prince Mohammed's economic reform programme, Vision 2030, is predicated on the launch of huge investment programmes aimed at creating jobs in the private sector and decreasing the kingdom's dependence on oil revenue. Already some of the 2020 targets in the interim National Transformation Programme have been moved back or look unlikely to be hit. Young Saudis are still reluctant to take up jobs in the private sector, preferring the security and higher pay scales of the civil service. In order to create employment for Saudis, some 2mn foreigners have been repatriated over the past year or so. But by no means all the freed-up jobs have been filled, so many businesses face difficulties getting by. Tackling these problems will be high on the crown prince's 2019 to-do list, for if there is anything that might ultimately threaten his leadership in the future it would be failure to deliver the better life for Saudi citizens promised by Vision 2030.

Raising money will be a high priority in the months ahead. With the planned IPO of 5pc of Saudi Aramco postponed indefinitely, the focus will be on Aramco's expected purchase of a majority stake in state petrochemicals giant Sabic. Aramco will be calling on international banks with a view to borrowing $50bn to fund the acquisition of most of the Public Investment Fund's 70pc stake in Sabic.

The Sabic takeover is part of Aramco's strategy of turning itself into a fully integrated energy firm on the international stage. As part of this process, preliminary work will begin in 2019 on the site in Yanbu on the Red Sea chosen for the proposed $20bn joint Aramco-Sabic venture to convert crude oil to chemicals. The project, with start-up planned for 2025, will process 400,000bl/d of crude oil to produce 9mn t/y of chemicals.

Aramco will also seek to expand its global network of refining and petrochemical interests, with plans to expand cooperation with both China and Russia. Ties with Russia, in particular, will strengthen still more in 2019, as the two giant oil producers seek to align themselves in adjusting oil production to keep the market in balance. Saudi energy minister Khalid al-Falih said in 2018 that "we need to establish the framework of long-term coordination" that will "allow us to bring production up or down".

Saudi Arabia and Russia are discussing a range of energy-related joint ventures, and Aramco is expected to take a final investment decision in 2019 on acquiring a share in Russia's Arctic LNG-2 project. Falih will also be looking for other global LNG ventures where Aramco might find a slot, as it prepares for the day when it imports natural gas.

There are compelling reasons why Saudi Arabia needs to polish up its image

While the downstream may receive most attention in 2019, the upstream—the current sole source of revenue to finance development in the kingdom—will not be overlooked. Saudi Arabia produced 10.48mn bl/d in August, and the average rose to 10.7mn bl/d in October. While the kingdom consistently says that its maximum capacity is 12mn bl/d, the likelihood is that this figure will not be put to the test in the coming year. With an eye on missing barrels from sanctioned Iran and economically and politically-challenged Venezuela, the kingdom is expected to maintain an operational capacity ceiling of around 11mn bl/d. It could also eventually call on an additional 250,000 bl/d, its portion of potential production from the Neutral Zone, which is shared with Kuwait. Recent talks to end the dispute that has kept oil from the shared fields shut in for the past four years ended without agreement, and there is no indication that Saudi Arabia will be in a hurry to find a resolution to the issue in the months ahead, given weak crude prices.

Away from energy, Crown Prince Mohammed will be under pressure from his family and from Saudi allies to take whatever steps are needed to end the war in Yemen and lift the economic and diplomatic blockade of Qatar. UN-sponsored talks on Yemen can be expected during 2019, but swift progress is unlikely, not least because there are so many competing interests in the country. One difficult question is whether southern secessionists should be represented at the negotiating table. Another is whether it is realistic to find one man who can win the support of the many factions vying for influence.

Lifting the Qatar siege would, in theory, be a much easier job, given political will on both sides. But the Qataris, who have adjusted to life under blockade, will demand a high price in terms of public apologies from Saudi Arabia and its allies as a condition for agreeing to normal relations. The kingdom will not accept such terms, so the dispute that has poisoned the atmosphere in the Gulf and shown the GCC to be a toothless regional organisation is likely to fester through 2019.

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